Exchange mergers

Huddling for comfort

The Tokyo and Osaka bourses get together

THE pressures on established stock exchanges are immense. Revenues from cash-equities trading are plunging amid fierce competition; the number of initial public offerings (IPOs) is in long-term decline; the opportunities for growth lie in the movement of derivatives onto exchanges. Exemplifying the trend, IntercontinentalExchange, an upstart specialising in energy derivatives, swooped in December for NYSE Euronext, which runs the New York Stock Exchange among other things.

It makes matters an awful lot worse if you add in two decades of relative economic decline. The value of Japanese stocks has slumped by three-quarters since December 1989. The number of foreign companies listed on the Tokyo Stock Exchange (TSE) has plummeted from 127 to just ten in the same period. Tokyo now trails behind Singapore, Shanghai and even Shenzhen as a venue for listings. Last year it hosted less than 1% of global IPOs by value, according to Bloomberg. In the words of one analyst, that leaves the TSE “sucking on air”.

Hence the merger, on January 1st, of the TSE and the Osaka Securities Exchange under a new holding company, Japan Exchange Group. The deal, which is in effect a takeover of the Osaka bourse by the TSE, creates the world’s third-largest exchange by market capitalisation. Atsushi Saito, the group’s new chief executive, calls it “a defensive merger” that combines Tokyo’s cash-equities business with the derivatives activity of the Osaka exchange. The new group will provide a one-stop service for everything from Nikkei 225 stocks to government bonds, putting Japan back at the “leading edge” of the industry.

Perhaps, but with the notoriously bureaucratic Tokyo side in the driving seat (Mr Saito is the TSE’s former head) many fear the deal will simply produce a bigger target for low-cost rivals to knock over. The TSE looks increasingly old-fashioned alongside electronic exchanges such as Chi-X, which charge a tiny fee for each trade.

Ambitions for the new bourse to attract firms and investors from elsewhere in the region will also be hard to realise for governance reasons. “It is virtually the only stock exchange in Asia without proper rules for director training or disclosure,” says Nicholas Benes of the Board Director Training Institute of Japan, an NGO. Nor will the deal alter the TSE’s culture of subservience to Japan’s Ministry of Finance, although putting it together with the more independent-minded Osaka exchange might provide incentives to change, says Sadakazu Osaki of the Nomura Research Institute.

In theory the new holding company is open to a hostile bid by a foreign operator. Most analysts predict the Japanese government would intervene if that happened, just as the Australian government blocked an $8 billion bid by Singapore’s stock exchange for the Australian exchange in 2011. Mr Saito says he is unafraid of a takeover for that reason. Come what may, the pressure to keep consolidating will not go away.